Married couples in business together are common occurrences for Enrolled Agent tax work. In fact, new couples arise every year that mingle their marriages with commercial endeavors. Hence, Enrolled Agents must remain vigilant about uncovering the financial expectations of these couples and rendering suitable advice about the tax consequences.
After a couple devises an understanding about the personal arrangements of their business, they typically require assistance with the monetary aspects. Businesses that are marital partnerships have certain tax features. Married couples are not required to provide partnership tax returns for their joint businesses. Instead, a tax expert with Enrolled Agent certification can help a married couple divide tax reporting into two separate proprietorships. The spouses apportion income and each category of expense according to their respective ownership percentages.
When completing a separate Schedule C for the allocation of income and expenses between each spouse, self-employment tax is paid by both parties. This prevents the potential limitation on that tax by showing all profits as belonging to only one spouse. The IRS gets quite upset when reporting only one spouse as the business owner reduces self-employment tax but both spouses materially participate in managing the operation.
Fortunately, a tax advantage described in Enrolled Agent study materials is available when both spouses work. A married couple with a joint business is eligible for a tax credit based upon the cost paid for childcare – if their income is beneath the ceiling imposed for this benefit.
Spouses in community property states may also divide income and expenses – even if only one spouse owns the business. This does not modify the impact on a joint federal income tax return because the owner pays self-employment tax on all the business net earnings. However, separately filing spouses will encounter differential tax assessments when following these community property state rules.
The division of income is mandatory for unmarried couples on their separate federal tax returns. This includes couples who are registered domestic partners under laws that exist in California and other states. Enrolled Agent training reveals that the federal government only allows joint tax returns for husband and wife marriage unions.
Joint filing is not available to same sex spouses, domestic partners, or significant others – regardless of operating a business together. A partnership tax return is required of these couples. In addition, some husband and wife couples may prefer reporting on a partnership tax return. This allows for the creation of distinctive capital accounts for each individual. A formal partnership agreement may define rights of succession. Couples can thus arrange for transfer of separate ownership interests to different heirs.
An equal partnership might not comprise the optimal path if one spouse commits most of the time or contributes substantial separate capital to the enterprise. When one spouse is the decision maker, any contributions by the other spouse generally represent an employee situation. That allows the proprietor to hire the non-owner spouse and provide benefits, such as health insurance. The business pays premiums for the spousal employee and dependents – which, of course, includes the business owner. When employee benefits – like health insurance for the whole family – are a business expense, self-employment tax is reduced.
Establishing a business as an S corporation usually changes very little about the allocation of earnings between married individuals participating in the operation. Moreover, special rules known from Enrolled Agent education apply to tax treatment of employee benefits for S corporation shareholders. Advice from an EA is crucial whether the business arrangement for a couple is intended as a partnership, S corporation, or single owner proprietorship.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.